New Study: How President Obama Can Help Restore the Pro-Trade Consensus
Since taking office, President Obama seems to have discovered that anti-trade rhetoric, while popular on the campaign trail, isn’t so useful to a sitting president whose policies will have lasting consequences, says trade analyst Daniel J. Ikenson in a new Cato study.
In “Audaciously Hopeful: How President Obama Can Help Restore the Pro-Trade Consensus,” Ikenson and international trade attorney Scott Lincicome argue that the time has come “to arrest and reverse America’s misguided and metastasizing aversion to trade,” which has “been shaped overwhelmingly by relentless political rhetoric.”
The authors’ suggestions for President Obama include:
- Establish a “trade transparency initiative,” with the goal of publishing independent findings about the effects of trade and trade barriers on the U.S. economy, without political interference.
- Reinforce for Congress the fact that a unilateralist trade policy undermines multilateral foreign policy, as well as President Obama’s personal efforts toward repairing America’s damaged image abroad.
- Craft a pragmatic, principled approach to enforcement of standing trade agreements.
- Adopt a China policy of carrots and sticks, including a continued push for China to open more of its markets while resorting to the WTO dispute settlement system only when the situation and facts support doing so.
- Craft a proactive agenda now for implementation when trade consensus re-emerges.
America Alone on Punitive Corporate Taxes
In Tax Notes International today, two Ernst and Young experts describe how corporate tax reforms in Japan have made America an even bigger outlier in its punitive treatment of multinational corporations:
Japan’s recent adoption of a territorial tax system as part of a broader tax reform reduces the tax burden on the foreign-source income of Japanese multinational corporations.
Before the Japanese reform, the two largest economies had both high corporate income tax rates and worldwide tax systems. Now the United States not only has the second-highest corporate income tax rate of the OECD countries, it is also one of the few that still have a general worldwide tax system.
The Japanese corporate tax reform is part of a global trend toward reduced taxation of corporate income, which often takes the form of a significantly reduced corporate tax rate but also is reflected through reduced taxation of foreign-source income.
The details of the president’s budget proposal to reform deferral are expected in the coming weeks. As we await the specifics, it is clear that the direction of the proposal runs counter to this strong current of global corporate tax reform with lower overall corporate tax rates and reductions in domestic taxation of foreign-source income.
In simple terms, Japan’s reforms may give firms such as Toyota or Hitachi an advantage over firms such as Ford or General Electric in international markets.
Alas, U.S. policymakers don’t seem to understand that in a globalized world of free-flowing capital we need to change our uncompetitive tax policies. At Cato, we will keep trying to educate them, but it is sad that our economy loses jobs and investment because our elected leaders are such slow learners compared to leaders in Japan, Jordan, Canada, and elsewhere.
Globalization and Tax Reform
Despite the recession, globalization continues to exert pressure for beneficial tax reforms. From Tax Notes International today:
Jordanian Finance Minister Bassem al-Salem on April 20 confirmed that the government is working on draft legislation that would cut corporate tax rates drastically, reducing them in some cases by more than half.
Al-Salem said the government will seek to introduce a single 12 percent tax rate for most corporate entities, although companies in the banking, insurance, and mining sectors would pay tax at a rate of 25 percent. The current corporate tax rates range from 15 percent to 35 percent for different profit levels and also differ by business sector.
The draft legislation would also rationalize individual income tax, custom duties, and other taxes to increase efficiency, al-Salem said. Jordan has about 100 different taxes.
Al-Salem said the tax cuts are needed because many countries in the region either don’t have taxes at all or have much lower tax rates than Jordan’s, making them more attractive jurisdictions for investment.
The full story on taxation and globalization is here.
Law Waves U.S. Flag at Pirates
Yesterday the U.S. House passed by voice vote a resolution praising the captain and crew of the U.S.-flagged ship Maersk Alabama that was seized by Somali pirates earlier this month. It was a riveting story that ended well for the brave crew and their Captain Richard Phillips, thanks to the work of Navy Seal sharpshooters. But one question that has yet to be adequately discussed is just what that ship was doing over in such dangerous waters off the coast of strife-torn Somalia.
The answer may surprise you: the U.S. government sent them there.
The ship and its American crew of 20 were delivering U.S.-government food aid to Africa. Under the Food Security Act of 1985, food aid sponsored by the U.S. Department of Agriculture and the U.S. Agency for International Development must in most cases be delivered by U.S.-owned, flagged and crewed ships. The law is one of several, including the Jones Act, that are designed to steer business to generally high-cost U.S. shipping companies.
The laws in that narrow sense have worked: While 95 percent of international cargo arriving in the United States each year is carried by lower-cost, non-U.S.-flagged ships, 83 percent of U.S.-sponsored food-aid cargo is carried by U.S.-flagged ships. [You can read a WTO critique of U.S. cargo shipping preference programs beginning on page 121 of its 2008 review of U.S. trade policy.]
Such laws are anti-competitive and cost U.S. companies and taxpayers millions of dollars a year in higher shipping costs. But the case of the Maersk Alabama reveals another unintended cost. Almost by definition, food aid goes to regions troubled by war, civil strife and oppressive governments. The Food Security Act essentially requires American civilians to be inserted into dangerous places, which creates yet another inviting target for pirates and another argument for a U.S. military presence.
The U.S. government could ship its official cargo at lower costs, and keep civilian American citizens out of harm’s way, by repealing all its protectionist, anti-competitive cargo preference laws.
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